Final Report for Industry Canada
With respect to the study
International Patent Strategies for Biopharmaceutical Small and Medium-sized Enterprises (SMEs) in Canada
March 2013
INTERNATIONAL PATENT STRATEGIES FOR BIOPHARMACEUTICAL SMALL AND MEDIUM-SIZED ENTERPRISES (SMES) IN CANADA This publication is also available online in HTML and .pdf formats at lifesciences.ic.gc.ca. Aussi offert en français sous le titre: STRATÉGIES INTERNATIONALES EN MATIÈRE DE BREVETS POUR LES PETITES ET MOYENNES ENTREPRISES (PME) AU CANADA Cette publication est disponible en ligne en formats HTML et pdf à sciencesdelavie.ic.gc.ca. Release Note: Published by Industry Canada, March 2013. Permission to Reproduce: Non-commercial Reproduction Except as otherwise specifically noted, the information in this publication may be reproduced, in part or in whole and by any means, without charge or further permission from Industry Canada, provided that due diligence is exercised in ensuring the accuracy of the information reproduced; that Industry Canada is identified as the source institution; and that the reproduction is not represented as an official version of the information reproduced, nor as having been made in affiliation with, or with the endorsement of, Industry Canada. Commercial reproduction For permission to reproduce the information in this publication for commercial redistribution, please contact: Industry Canada Pharmaceutical Sector Directorate 235 Queen Street Room 727E Ottawa, Ontario K1A 0H5 Disclaimer: Funding for this report was provided by Industry Canada. The views and opinions expressed in the report are those of the author alone and do not represent, in any way, the views or opinions of the Department of Industry or of the Government of Canada.
Table of Contents KEY FINDINGS............................................................................................................................................3
BACKGROUND, METHODOLOGY AND APPROACH TO THE STUDY ...................................................4
MAIN CONTENT..........................................................................................................................................5
a) Overview of the Biotechnology Industry in Canada ...........................................................5
i. Current state of biotechnology industry ................................................................5
ii. Current state of biopharmaceutical companies ....................................................6
iii. Current state of spinoff companies from Canadian universities ...........................7
iv. Current state of Big Pharma’s interest in Canadian biopharmaceutical companies.............................................................................................................8
v. Current state of investors’ interest in Canadian biopharmaceutical companies.............................................................................................................9
vi. Canadian biopharmaceutical SMEs and Contract Service Providers...................9
b) Overview of Typical Patent Strategies of SMEs ..............................................................10
i. Different strategies depend on products (chemicals, biologicals, diagnostics / instrumentation) .............................................................................10
ii. Cost considerations and budgets........................................................................15
c) Patent Checklists for SMEs .............................................................................................16
i. Patent portfolio ....................................................................................................16
ii. Chain of title ownership/assignments .................................................................17
iii. Freedom to operate (FTO)..................................................................................18
d) Key Patent Questions That Investors Ask .......................................................................18
e) A “Blue Sky” Patent Strategy for SMEs ...........................................................................19
i. What are investors looking for? ..........................................................................19
ii. What is Big Pharma looking for?.........................................................................19
iii. Should the patent strategy differ according to the “exit”? ...................................19
iv. Defensive and offensive patent strategies..........................................................20
f) How Are Patent Strategies Typically Handled in SME–Big Pharma Alliances?..............21
g) Typical Mistakes Made by SMEs Relating to Strategies .................................................22
i. Which mistakes will investors/Big Pharma tolerate? Which mistakes break an investment / deal?................................................................................22
ii. How to fix mistakes? ...........................................................................................24
h) Licences as an Integral Part of the IP Strategy ...............................................................25
i. In-licences ...........................................................................................................25
ii. Out-licences ........................................................................................................25
i) Due Diligence Checklist ...................................................................................................26
j) Establishing a Business ...................................................................................................27
k) Financial Incentive Programs for Biotech Companies .....................................................27
CASE STUDIES AND LESSONS LEARNED............................................................................................28
a) Specific Questions Posed by Industry Canada................................................................28
b) Additional Questions that Torys Answers in its Report:...................................................30
APPENDIX A — FINANCIAL INCENTIVE PROGRAMS FOR SMES.........................................................1
Scientific Research and Experimental Development (SRED) Credits............................................1
i. Federal SRED Credits ..........................................................................................1
ii. Provincial SRED Credits .......................................................................................2
iii. Summary of SRED Credits ...................................................................................3
iv. Other Incentives for Biopharmaceutical Companies.............................................3
APPENDIX B — AUTHOR BIOGRAPHIES.................................................................................................1
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Key Findings The following are the key findings of this Report:
Patents are critical to an SME’s success, regardless of whether its success depends on attracting
investors or attracting deals from large international pharmaceutical companies, referred to in this
Report collectively as a group as “Big Pharma” or individually as “a/the Big Pharma.”
A sound patent strategy must include both offensive and defensive aspects because patent
litigation invariably accompanies a successful biopharmaceutical product.
Executive and board attention to the patent strategy of an SME is a necessity.
SMEs could benefit from learning from the patent strategies of SMEs that have been successful
in attracting investment from investors or deals with Big Pharma. Successful patent strategies are
typically those that include the involvement of management in their formation and execution,
repeated and consistent alignment between the patent strategy and the business strategy, rigour
in cost control and preparedness in answering difficult patent-related questions from potential
investors and partners as well as from Big Pharma.
Successful SMEs in Canada are often characterized by having an innovation that is capable of
being put into practice, that is patentable, that has a commercial market and that someone will
pay for.
SMEs that are interested in attracting deals from Big Pharma would benefit from following a
patent strategy that aligns with the growth strategies of the Big Pharma that they are targeting
(strategies such as conforming to trends in the industry and geographical areas for expansion).
Given the challenging investment climate for SMEs in Canada, the patent strategy of an SME is
under increased scrutiny while it seeks out investments.
The “patent cliff” facing Big Pharma works to SMEs’ advantage in that Big Pharma is continuing
to look for licensing deals or to acquire SMEs; patents are a critical part of those deals.
Ownership of patents must be dealt with early and effectively. Questions or uncertainty regarding
the ownership of intellectual property rights can extinguish deals very quickly.
Because companies need substantial resources to be successful, a Canadian strategy of putting
more resources, including patent strategy support, into a smaller number of carefully selected
SMEs is likely to lead to increased success in this sector.
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Background, Methodology and Approach to the Study This Report was commissioned by Industry Canada to determine the current state of international patent
strategies for biopharmaceutical small and medium-sized enterprises (SMEs) in Canada. The authors
were selected to prepare the Report on the basis of their significant U.S., Canadian and international
expertise in the subject matter of this Report.
The authors prepared this Report by drawing on their decades of experience in
deals involving international patent strategies of SMEs;
advising investors (U.S., Canadian and international) in SMEs on the viability of patent strategies; and
advising Big Pharma to assess whether to license patents from SMEs or to acquire SMEs because of the value of their intellectual property (IP).
The Report was reviewed by other experts in the field at Torys LLP (including Conor McCourt and
Andrew Shaughnessy) and in consultation with CEOs and other executives of SMEs, Big Pharma
and investors in the sector. Some experts the authors spoke to, have provided their input, but wished
to remain anonymous. The authors are grateful to and thank all of those persons involved.
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Main Content a) Overview of the Biotechnology Industry in Canada
i. Current state of biotechnology industry
“Biotechnology” enterprises are enterprises that manufacture, process, use and otherwise exploit
biological materials. Biotechnology enterprises exist in various sectors. In Canada, the market can be
segmented into five sectors: (1) medical/healthcare; (2) food and agriculture;1 (3) environment and
industrial processing; (4) service providers; and (5) technology services.2 Medical/healthcare is the
largest segment of the biotechnology market in Canada.3 It accounts for 67.4% of the market’s total value
and brought in total revenues of $2.3 billion in 2011.4 This Report focuses on the medical/healthcare
(i.e., biopharmaceutical) sector.
Funding for Canadian biopharmaceutical companies declined after the 2008 global financial crisis.
However, biopharmaceutical companies with innovations that are protectable, have good market potential
and strong management teams are able to obtain various sources of funding, including angel, venture
capital (VC), private equity and non-dilutive government and quasi-government funding.5 Moreover,
recent success by U.S. venture capitalists and other foreign investors investing in Canadian
biopharmaceutical companies bodes well for foreign funding of other high-quality small and medium-sized
biopharmaceutical enterprises (SMEs). While investors are more selective than they were prior to 2008,
the Canadian biotechnology market is expected to grow with a forecasted compound annual growth rate
of 6.8% in the period 2011–2016.6 Canadian biopharmaceutical companies would benefit by this
projected growth.
1 Food and agriculture accounts for 23.8% of the market and contributed revenue of $0.8 billion in 2011. MarketLine Industry Profile: Biotechnology in Canada, July 2012, at page 9. 2 Ibid. 3 Ibid. 4 Ibid. 5 Ernst & Young, Beyond Borders: Global Biotechnology Report 2012, at page 1. 6 MarketLine Industry Profile: Biotechnology in Canada, July 2012, at page 11.
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A sound patent strategy and robust patent position for the key assets of the Company have always been, and remain, one of the pillars for building value in a biotech company. Firms need to consider, and act on, both defensive and offen sive stra tegies with re spect to filing, prosecution a nd licensing in order to accomplish this. Additionally, attention must increasingly be paid to the competitive IP position of the Company in the emerging markets that play an expanding role in the growth strategies of the ph armaceutical industr y. Early and continued executive and Board attention to the construct, mainte nance, and growth of the Company's IP position is a must-have in biotech.
Peter Thompson, MD — OrbiMed Advisors LLC7
The extent to which companies that manufacture, use or sell products rely on patents to exclude other
companies from manufacturing, using or selling the products claimed in the issued patents differs by
sector. Although the biopharmaceutical sector relies heavily on patents for these purposes, in general,
some parts of the sector, including healthcare, are less dependent on patents (though healthcare
continues to explore the availability of software patents and business method patents).
For a Canadian biopharmaceutical company to commercialize a product or process that is an innovation,
the following four criteria must be met: (1) the innovation must be capable of being put into practice;
(2) the innovation must be protectable; (3) the innovation must have a commercial market; and (4) the
innovation must be one that someone will pay for. Many innovative products of SMEs meet one or two of
these criteria, but few products meet all four. International patent strategies must be developed on the
basis of these criteria. Thousands (and even millions) of dollars can be spent on an international patent
strategy; but if the product of the SME does not have a market or if there is no assurance that someone
will pay for the product, the chances of the SME succeeding are low.
ii. Current state of biopharmaceutical companies
The biopharmaceutical market in Canada is characterized by well over 200 start-ups and SMEs and a
small number of large pharmaceutical companies, many of which manufacture or sell biopharmaceutical
products.8 Big Pharma with an interest in biopharmaceutical products in Canada includes Abbott, AbbVie,
Amgen, AstraZeneca, Biogen Idec, Bristol-Myers Squibb, Celgene, Eisai, Eli Lilly, Genentech, Genzyme,
Gilead, GlaxoSmithKline, Hoffmann-La Roche, Janssen (Johnson & Johnson), Merck, Monsanto,
Novartis, Pfizer, Sanofi, Shire, Takeda and Teva.
7 Peter Thompson, MD, is currently a venture partner with OrbiMed (San Francisco, CA). He has over 20 years of industry experience. He co-founded and was CEO of Trubion Pharmaceuticals, co-founded Cleave Biosciences, and serves on the boards of Cleave, Anthera, Methylgene, Principia Biosciences and Response Biomedical. 8 See membership list of BioteCanada, the Canadian industry organization whose members have an interest in biotechnology products and services (www.biotech.ca).
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Historically, Canada has produced proportionately many more early-phase biopharmaceutical companies
than the United States and other countries with vibrant biotech industries. However, the lengthy and risky
path to product development and commercialization, the large amounts of capital required and the
difficulty in obtaining such capital have led to a contraction in the number of SMEs in the sector in
Canada. Some of this contraction is a necessary result of market forces, which over time will likely
produce a stronger group of industry players. A Canadian strategy of allocating more resources to a
smaller number of carefully selected SMEs is likely to lead to increased success in this sector because
companies need substantial resources to succeed.
In 2012, Canada saw a number of large acquisitions in the biopharmaceutical sector: Enobia, a phase II
drug company was acquired by Alexion for an upfront payment of $610 million and up to an additional
$470 million; YM Bioscience was acquired by Gilead for $516 million; and Cytochroma was acquired by
Opko Health for an upfront payment of $100 million and up to an additional $190 million.
iii. Current state of spinoff companies from Canadian universities
Canadian universities’ policies regarding IP and ownership vary widely, with some universities taking the
position that the inventor owns 100% of the IP, including patents (e.g., University of Waterloo9) and other
universities taking the position that the university owns 100% of the IP, including patents (e.g., UBC).10
Canadian academic institutions have lagged behind their U.S. counterparts11 in commercializing their
innovations because of academia’s historical views regarding the appropriateness of commercialization;
however, due to the large number of invention disclosures and recent efforts to accelerate
commercialization and bolster the industry, the country’s top hospitals and universities are expected to
show strong growth in commercialization. Success will depend in large part on the ability of universities,
hospitals and investors to discern the potential commercial winners and their willingness to invest time
and resources in only those projects.
Canadian hospitals and universities have enjoyed some success in this area. One such story is Sentinelle
Medical Inc., one of whose founders, Cameron Piron, was the first Canadian to be named R&D
Magazine’s 2008 Innovator of the Year.12 Piron began developing his new technology as a graduate
student working with Dr. Donald Plewes, a senior scientist at Toronto’s Sunnybrook Research Institute. In
2004, Piron and two Sunnybrook colleagues co-founded Sentinelle Medical to commercialize the
9 http://uwaterloo.ca/secretariat/policies-procedures-guidelines/policy-73-%E2%80%93-intellectual-property-rights. 10 UBC Policy 88 (www.uilo.ubc.ca) - http://www.universitycounsel.ubc.ca/files/2010/08/policy88.pdf. 11 http://triplehelixinnovation.com/canadian-universities-the-innovation-gap-and-leaping-the-landline/3501. 12 http://www.mri.gov.on.ca/english/ontario_innovates/sentinelle.asp.
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Vanguard Breast MRI system.13 The company was eventually sold to Hologic Inc. for $85 million, plus a
two-year contingent earnout.14
iv. Current state of Big Pharma’s interest in Canadian biopharmaceutical companies
For the pharmaceutical industry, the last days of 2012 will mark the end of the patent cliff, an approximately 18-month stretch during which major drug companies lost exclusive rights to many billion-dollar-selling drugs. The cliff could be seen coming for a long time. Indeed, efforts to mitigate the expected loss in profits kicked in years ago as drugmakers struggled to invent and commercialize replacement blockbuster drugs. As, one by one, those efforts failed, the industry turned to more creative ways of going over the cliff and surviving. They shifted their focus to developing drugs for unmet medical needs, expanding in growing geographic markets, licensing drug candidates from biotech companies, buying biotech companies, partnering with innovative research organizations, and gutting bloated research organizations. Some companies played the “if you can’t beat ’em, join ’em” card by bolstering generics portfolios. 15
Big Pharma continues to show great interest in biopharmaceutical companies, including Canadian
companies. Many high-revenue-producing drugs have gone off patent in recent years and Big Pharma
has focused intensely on filling the product pipeline. According to CNBC, “The big U.S. and European
drug companies are dealing with a ‘cliff‘ of their own as blockbuster drugs lose their patent protection.”16 It
is estimated that the cliff could cost the industry $25 billion.17 These companies are looking to SMEs to
help them fill their pipeline.
As Canadian SMEs have struggled in recent years to obtain financing, Big Pharma’s interest in licensing
or acquiring products from SMEs has increased. It is well recognized that changes within Big Pharma,
including the patent cliffs, have helped to buoy the biopharmaceutical sector and that Big Pharma no
longer prefers its own R&D to outside innovation.
Indeed, one of Canada’s leading pharmaceutical companies, Valeant Pharmaceuticals International Inc.
(formerly Biovail), is an example of a Big Pharma in acquisition overdrive. Valeant has revamped its
strategy in recent years, focusing on M&A to become “the largest publicly traded Canadian-based drug
company, sporting a $20-billion (Canadian) market capitalization.”18 In recent years, Valeant has cut its
13 https://info.uwaterloo.ca/www/profiles/profile.php?id=149. 14 http://investors.hologic.com/index.php?s=43&item=406. 15 http://cen.acs.org/articles/90/i50/Beyond-Patent-Cliff.html. 16 http://www.cnbc.com, January 13, 2013. 17 http://www.cnbc.com, January 10, 2013. 18 http://www.theglobeandmail.com/report-on-business/rob-magazine/how-valeant-became-canadas-hottest-stock/article8889241/
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own research and development budget (now less than 5% of sales), favouring acquisitions of outside
products.19 Valeant has made 57 acquisitions since 2008.20
v. Current state of investors’ interest in Canadian biopharmaceutical companies
The global financial crisis that began in 2008 has had implications for SMEs, particularly because of the
capital-intensive nature of biotech R&D. As a result, Canadian SMEs have had to cut costs and develop
new and innovative approaches to make R&D more efficient and sustainable. While these efforts have
resulted in some improvement, the larger issue facing investors and SMEs is a funding and innovation
business model that is out of step with the current environment. SMEs in Canada have responded by
partnering with companies from other industries, partnering with the public sector to create investment
funds, tapping into public markets and securing VC financing by using a lean start-up methodology that
focuses on developing a technology as efficiently and cost-effectively as possible.21 Attractive Canadian
SMEs have also been successful in raising money from countries outside Canada.22
In an effort to stimulate innovation and improve access to VC financing, the Canadian government has
announced various programs, including the Venture Capital Action Plan, which will make $400 million
available to help increase private sector investments in the next seven to ten years.23
vi. Canadian biopharmaceutical SMEs and Contract Service Providers
One issue that can arise between Canadian biopharmaceutical SMEs and contract service providers
relates to the ownership of IP. If the Canadian SME requires a hospital, research institute or another
organization to assist in the research, development or early-stage clinical trials of a biopharmaceutical
product, the IP-ownership provisions in the contract between the SME and the other entity are key.
Specifically, the SME must ensure that the contract contains one of the following options: (1) assigns
ownership of all IP developed by the other entity to the SME; (2) provides that all IP is jointly owned and
specifies the rights of and restrictions on each party to the jointly owned IP; (3) exclusively licenses all IP
to the SME; or (4) gives the SME the option to acquire or exclusively license the IP. From the SME’s
perspective, the first option – the contract assigns ownership to the SME – is the most desirable and the
one on which investors and Big Pharma would place the most value.
19 Ibid. 20 Ibid. 21 Supra note 5 at page 55. 22 Richard Blackwell, “Small Canadian biotech firm lands financing,” The Globe and Mail, July 14, 2011, http://www.theglobeandmail.com/report-on-business/small-business/small-canadian-biotech-firm-lands-financing/article586920/; Julius Melnitzer, “Lawyers, U.S. firms filling Canada’s biotech void,” Law Times, June 13, 2010 http://www.lawtimesnews.com/201006147036/Headline-News/Lawyers-US-firms-filling-Canadas-biotech-void. 23 Nelson Wyatt, “Harper reveals venture capital investment details,” The Globe and Mail, http://www.theglobeandmail.com/report-on-business/small-business/sb-money/business-funding/harper-reveals-venture-capital-investment-details/article7328067.
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When SMEs reach the stage in which they conduct clinical trials through professional contract service
providers or use contract research organizations, the standard IP provisions generally provide that IP
developed in the course of the trial is owned by the SME.
b) Overview of Typical Patent Strategies of SMEs
When it comes to the life sciences, and biotechnology and pharmaceuticals more specifically , patents are valuable currency that pave the road for investors. It is critical for small and medium enterprises to ensure their key intellectual property (IP) asse ts are protected, starting with the core IP up to improvements and refinement of product details. SMEs should strive for a robust patent portfolio, which means paying close attention to research developments and seeking patent protection where indicated. Patent strategy should be developed early on and is a dynamic element of the business – a solid strategy will attract investors and development partners who recognize that strong patent protection is an indicator of successful products in the marketplace.
Rafi Hofstein, PhD — President and CEO MaRS Innovation
i. Different strategies depend on products (chemicals, biologicals, diagnostics / instrumentation)
A brilliant discovery (even one that is Nobel Prize-worthy) must be capable of being put into practice in
order to be commercialized. Commercialization typically requires the creation of either a product
(i.e., biopharmaceutical) or a service such as a procedure or diagnostic test, which might involve a
biopharmaceutical or determine which biopharmaceutical is the recommended drug for a particular
indication (i.e., personalized medicine).
Typical patent strategies. The typical patent strategies of SMEs have two components: (1) an inward-
looking component (protecting the innovations of the SMEs) and (2) an outward-looking component
(determining whether competitors’ patents may block commercialization or the SMEs’ freedom to operate,
or FTO). Early-stage SMEs typically focus on the first component (as they should by virtue of prioritizing
the allocation of scarce resources).
In a report titled “Challenges of a Biotech Startup” published by the Kellogg School of Management,
LeAnne Tourtellotte, COO of Maroon Biotech, a U.S. SME, addressed the patent challenge facing SMEs
and stated, “The learning curve (in the patents area) for a biotech startup … is steep and difficult. A
startup has to be willing to hire patent and regulatory consultants to help with these issues early-on in the
process. You can’t do it correctly the first and second time on your own.”24
24 At page 5, http://www.kellogg.northwestern.edu/biotech/faculty/articles/startupchallenges.pdf.
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Difficult patent concepts. Many early-stage SMEs struggle with the concept of the nature of a patent.
They mistakenly believe that a patent gives them the right to practise the invention; it does not. The
patent gives the SME the right (once granted) to prevent other persons from practising the invention as
claimed. That is why it is critical for SMEs to understand the concepts of the inward-looking component
(in-house patent program) and the outward-looking component (FTO), from the beginning. The
combination of these two concepts understood in light of the essential exclusionary nature of a patent
means that an SME finds itself with a patent position on its technology and, at the same time, a third-party
patent-blocking commercialization of its technology – a fairly common situation.
The other concept that SMEs often struggle with is the concept of workarounds (i.e., that a claim can be
designed in such a way by competitors as to avoid infringement). The SME must balance, on the one
hand, seeking sufficiently broad protection in the patent to protect the innovation (and prevent
workarounds) and, on the other hand, seeking protection that is not prohibitively expensive (the broader
the claims, the more likely the various patent offices will reject the claims either on the basis of lack of
support or utility or on the basis that the claims are broader than the invention; the legal fees required to
counter these claims can also be substantial). Early in the SME’s product life cycle, compromises are
made for budget considerations. As the SME secures substantial financing or is acquired by a Big
Pharma, the life cycle management strategy will include strengthening the patent protection for the SME’s
product to the degree that this can be done effectively after the fact.
Typical patent life cycle of SMEs. Most SMEs start thinking about patents early in the product
development process. Typically, many file a U.S. provisional patent application to cover the innovation.
They then possibly file additional U.S. provisional patent applications within one year of the date of filing
of the first U.S. provisional patent (to cover improvements in the innovation). The next step is often the
filing of a Patent Cooperation Treaty (PCT) application, sometimes called an “international patent
application” (claiming the benefit of the filing dates of the earlier filed U.S. provisional applications).25 The
innovation is published (in the PCT patent application) 18 months after the filing date of the first U.S.
provisional patent application. This cycle is repeated multiple times (for different innovations of the SME
or for improvements to the original innovation that are considered separately patentable).
Controlling costs. The challenge for the SME is that each patent cycle is associated with patent costs
that can quickly escalate. If the costs (of the patent filing and prosecution strategy) are not managed or if
there is no investor or Big Pharma to help with the costs, the cost of the patent program can be
burdensome, especially from a cost-benefit perspective. It is not uncommon for SMEs (or their investors)
to acknowledge, several years into the life cycle of the SME, that the SME has spent millions of dollars on
patent costs, yet their product is still years away from entering human clinical trials.
25 The phrase “international patent application” can be misleading, because it implies that one can ultimately obtain an “international patent.” That is not the case. Ultimately, the requirement is that national (e.g., U.S. or Canadian) or regional (e.g., EU) patent applications must be filed and prosecuted to obtain a patent in each country or region desired.
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It is essential for SMEs to control their costs. Compared with other industries, investments in
biopharmaceutical R&D, and in patents specifically, often constitute a significant portion of
biopharmaceutical SMEs’ total expenditures. The World Intellectual Property Organization estimates that
biotechnology companies generally invest between 40% and 50% of their total revenues in R&D
activities, considerably more than the 5% of revenues that the chemical industry spends or the 13% figure
associated with the pharmaceutical industry.26 Within the biotechnology industry, the amounts spent on
R&D typically vary in line with the size of the SME, with smaller companies spending an average of 194%
of total revenues on R&D activities and larger companies spending between 45% and 55% over the past
few years.27 Although these are U.S. statistics for companies listed on the Nasdaq Biotechnology Index,
we would expect that the findings are generally applicable to SMEs in Canada.
Given the cost pressures, there needs to be a rigorous determination and execution of the patent
strategy. A sound patent strategy is one that ensures that the costs of the patent program are controlled.
Assume, for example, that innovation is on its way to being put into practice (tested in the lab, etc.) and is
capable of protection (i.e., appears to be patentable in view of the prior art and other criteria under
applicable patent laws); however, it is unclear whether the innovation has a market or is one for which
someone will pay. Until these latter two requirements have positive answers, the SME must have a firm
handle on its costs. An SME that has a good grasp and control of its patent costs is easily identified by
investors and Big Pharma. Once it is clear that the innovation has a market and that someone will pay for
the product, life cycle management would include investing more heavily in patent protection (which in
turn is typically easier to do once investors or other partners are committed and invested in the SME and
its strategy).
Quality of patent applications. The patent applications filed by SMEs vary in quality, with some filed as
very rough U.S. provisional patent applications and others filed as top quality U.S. patent applications.
The quality of the patent application depends on a number of factors: whether it is filed quickly to ensure
that the innovation is protected by a patent application before publication by the inventor (i.e., the
inventor’s publication or intended publication forces the filing of a quick patent application); whether the
SME is financed adequately; whether the inventors wrote all or most of the application or whether the
application was a team effort (inventor, other R&D personnel and patent agent); and whether senior
management was actively engaged with the patent agent and in the patent strategy. Involvement of
senior management can have a significant impact on the quality of the patent application and the overall
strategy (i.e., whether the patent application and the strategy dovetail with the SME’s business plan).
Poor quality patent applications can deter an investor from investing in an SME and discourage Big
Pharma from licensing patents from or acquiring an SME.
26 World Intellectual Property Organization, “Patents at the Core: the Biotech Business,” http://www.wipo.int/sme/en/documents/patents_biotech.htm. 27 BDO, “Biotech Industry R&D Spending Jumps Five Percent in 2011,” http://www.bdo.com/news/pr/2263.
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Academic spinoffs. If an SME is a spinoff from a university or has founders who are also appointed to
Canadian universities or hospitals, there can be pressure to publish the SME’s innovations. This brings
added pressure to the patent program because the “blue sky” patent strategy is to file the patent
application before the innovation is published (blue sky strategy is discussed under (e) below). An SME in
this position (i.e., facing its own publications as prior art) is also unable to “roll over” the first filed
provisional patent application because to do so would mean that the SME’s own publication would be
cited against its own patent application as prior art (rendering the claims unpatentable).
Claiming the innovation. The ways in which the innovation can be claimed vary, depending on the field
(i.e., chemical, biological, diagnostics/instrumentation or ag-biotech). Generally, product claims (e.g., a
claim to the active pharmaceutical ingredient, or API, or device/diagnostic/instrument) are regarded as
stronger than claims to the dosage form (e.g., tablet, capsule, syringe, patch, kit), the formulation
(e.g., extended-release formulation, no-food-effect formulation) or the use (e.g., indicated for the disease
or disorder of Y; diagnosing the disease or disorder of Y). Life cycle management of the innovative
products of the SME would include considering the patent applications available to be filed from: starting
materials, intermediates, final active pharmaceutical ingredients, combination patents (drug-drug or drug-
device or other combinations) to dosage forms and formulations, to processes and methods of
manufacture, and to methods of treatment, indications and dosing regimens.
Investors generally prefer to invest in SMEs that have patents claiming products rather than patents
claiming methods or services. This is because the investors are focused on the four criteria for investment
outlined earlier in this Report, two of which include the need for a market and the need for someone
willing to pay for the innovation. The market for services or methods tends to be more difficult to evaluate
(and invest in) than the market for products. Services (and business methods) can be more challenging to
patent or the patents can be more challenging to enforce (i.e., enforcing patents against customers) and
this can have an impact on valuation and whether there are barriers to competitors entering the market.
Lack of data. An area that is challenging to SMEs (as well as to Big Pharma) is filing for the innovation
with limited (or no) data to support the innovation. Early-stage innovations are often characterized by little
or no supporting data.
In Canada, there have been recent challenges to patents that have been issued for important drugs but
that contain limited or no data. According to a recent publication of the Intellectual Property Institute of
Canada, “In Canada, the required utility is normally determined by ‘the promise of the patent.’ That is, the
patent itself is examined to see what utility the inventor has promised, and the patent will be invalid if that
utility is not established. This makes utility more difficult to establish in Canada than in the US or
Europe.”28 In addition, “evidence post-dating the filing date (of the patent application) such as the result of
28 Intellectual Property Institute of Canada, A Comparative Overview of Canadian, US and European Pharmaceutical Patent Systems, http://www.ipic.ca/english/pdf/IPIC%20pharma%20patents%20comparison%20chart%202012.pdf.
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subsequent clinical trials, may not be used to establish utility.”29 If Canada’s patent laws are out of step
with their counterpart laws in Europe and the United States, that can add more of a burden to SMEs in
their home country.
Lack of certainty. Generally, Big Pharma is looking for some (but not necessarily complete) certainty
regarding the soundness of the patents that they are buying or licensing from SMEs. The climate in three
areas can cause a lack of certainty: in the courts (i.e., litigation); in the policy of patent offices (i.e.,
whether patents will be granted and for what scope); and in the laws protecting innovations in the SME’s
home country compared with laws in other countries.
The litigation climate relating to the patents of Big Pharma in a given country can have an impact on its
level of interest in investing in SMEs. Patent litigators Andrew Bernstein and Yael Bienenstock have
considerable experience in patent litigation. They state, “In determining whether the utility requirement for
validity is satisfied, courts must answer the question, what does the patent promise the invention will be
useful for? Answering this question has a dramatic effect on patent validity.”30 The litigators suggest that
the following principles would help lead to more consistency and predictability in the courts’ determination
of promise: “(1) promise should be approached as an aspect of the inventive concept of the claim; (2)
promise should be considered on a claim-by-claim basis; (3) the determination of promise should adhere
to the principles of claim construction; (4) promise, and whether it has been met, must be analyzed using
the same information (in the patent or known to the skilled person); and (5) experts can assist by
explaining the perspective of the skilled person.”31
Lack of understanding of the patent/regulatory interface. It can be challenging to understand the
nuances of an international patent strategy, let alone also understand the nuances of the patent and
regulatory interface in a given country. However, this is a critical element of an SME’s strategy.
Considerations include data protection (protection for regulatory data regardless of the existence of any
patents for the product or services); listing patents on the U.S. Orange Book or Canada’s Patent Register;
the timing of filing regulatory submissions and the impact of the date of filing patent applications on the
eligibility for listing any patents to issue from those applications against the regulatory submissions; the
pricing review that can be triggered as a result of patents (e.g., Canada’s Patented Medicine Prices
Review Board); whether inventions included in regulatory submissions or supplementary regulatory
submissions are patentable; the impact of patents on market access (i.e., customers’ tendering for
products); and the impact of patents on public or private payment or reimbursement for products.
29 Ibid.
30 “Unpacking the “Promise of the Patent,” Bernstein and Bienenstock. CIPR forthcoming 2013. 31 Ibid.
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ii. Cost considerations and budgets
The costs for a patent program for an SME can vary from $10,000 in year 1 for a single filing done on a
budget to $10,000–$20,000 in year 2 (again, for a single filing done on a budget), and the costs typically
climb exponentially after that, depending on the countries in which the SME files its patent application.
Most SMEs have multiple innovations so their patent costs are a multiple of the foregoing. Patent cost
estimators are available for individual countries or for worldwide patent filings,32 which involve filing costs
and other costs (including examination, filing assignments/change of name documents, prosecution
costs). However, these are estimates only. The cumulative costs of filing and prosecuting a single patent
application (i.e., moving the application forward to an issued patent) in industrialized countries are
substantial (over a hundred thousand dollars), especially in the life sciences/biotechnology area.
In selecting countries in which to file the patent application, most Canadian SMEs would, at a minimum,
select Canada, United States, Europe and then select from a group of others, including Mexico, Japan,
Korea, Australia, India, China and South American countries. The decision regarding the countries in
which to file is not made until 30 months (in some countries later) after the filing date of the earliest patent
application. This 30-month period is made available by the PCT. It benefits SMEs because it allows them
to defer the decision (and concomitant costs) of the countries in which they wish to file a patent
application, but affords them the benefit of claiming back to the first date of the filing of the priority patent
application in the PCT patent application (or the benefit of claiming back to the filing date of the PCT
patent application, if there is no priority patent application). If SMEs make the decision to file without any
commitment from investors or Big Pharma to support the filing program, the risk of uncontrolled costs
increases significantly. The dilemma is that many SMEs believe in their innovations, believe they will be
financed, believe they will partner with Big Pharma and are willing to finance these filings (with help from
friends, family and angel investors). There are, however, different strategies that could be used to temper
the costs, albeit not without risks. These strategies include rolling over the provisional filing; abandoning
the first application before publication and refiling; focusing on improvements to the innovation in the
patent program; filing in selected countries; or deferring filings until data support the innovation to be
claimed in the patent.
It is common for insufficient rigour to be applied to cost decisions, and the default is often to file broadly.
As a result, the costs of such filings have the potential to overwhelm the SME in later years.
32 http://www.globalip.com/.
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c) Patent Checklists for SMEs
Investors and Big Pharma typically utilize checklists to evaluate the patent program of SMEs. To prepare
for such an evaluation, SMEs should be proactive and have answers to the questions in these checklists.
Investors and Big Pharma remark that SMEs make it easy for them to invest in or to continue considering
them as targets if the SMEs enable investors and Big Pharma to readily understand their patent portfolios
and patent strategies (among other criteria that investors/Big Pharma consider). Furthermore, SMEs that
rehearse the answers to difficult questions and have succinct and thoughtful presentations on their patent
portfolios and strategies are more likely to advance to the next round of discussions than SMEs that do
not prepare adequately for such due diligence.
The following are some sample checklists:
i. Patent portfolio
1. Provide a chart of all of the patents, patent applications and drafts of patent applications
a) owned by the SME
b) licensed to the SME
c) optioned by the SME
2. Ensure that the chart lists (1) country; (2) application no./registration no.; (3) names of inventors;
(4) applicant (i.e., inventors, SME or other); (5) current status (e.g., filed, in prosecution, granted,
in opposition); (6) brief description of the invention as claimed.
3. For patents in prosecution, describe the status in detail (e.g., third office action; rejections based
on x, y, z; interview planned).
4. Provide a chart of all inventions for which patent applications are to be filed in the coming year
and subsequent years.
5. Provide details of any disputes relating to patents, including those (1) asserted by SME,
(2) sought by SME and (3) opposed by others (e.g., in Europe).
6. Provide a summary of how the patent strategy dovetails with the current business plan of the
company and published financing documents (i.e., documents published to attract investors in the
company).
7. Provide any prior art searches or patentability opinions obtained.
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ii. Chain of title ownership/assignments
1. Who are the inventors?
2. Are all the inventors listed in the patent applications?
3. For whom did the inventors work at the date of invention?
4. Did the inventors have an employment (or other) contract regarding ownership and assignment?
5. Did the inventors assign all rights to the company?
6. If there was an intermediary (or multiple intermediaries) involved (e.g., the inventor worked for a
university), did the inventor properly assign to the intermediary and did the intermediary properly
assign to the company?
7. Are the assignments for worldwide rights?
8. Do the assignments obligate the inventors to assist with prosecution of the patents and to assist
with litigation (if the patents require enforcement or are challenged)?
9. Was biological material involved with the invention – if yes, did all persons with a possible
ownership interest in that material assign ownership to the company (through proper chain of
title)?
10. Were designs/drawings involved with the invention – if yes, did all persons involved assign
ownership to the company (through proper chain of title)?
11. Are inventors generally cooperative or will they resist attempts to help prosecute or enforce the
patent? (i.e., will the execution of the assignments mentioned in viii above be smooth or
challenging?)
12. Are there any claims against the SME relating to ownership in or rights to its innovations – if so,
are all details provided?
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iii. Freedom to operate (FTO)
1. Provide a broad overview of FTO strategy.
2. Outline FTO searches conducted:
a) how often
b) by subject matter (if so, provide terms)
c) by individual/company (if so, provide list)
d) restrictions, if any, on search
e) databases used
f) dates of searches
g) analysis of searches
h) copies of most relevant patents uncovered
i) opinions sought/provided
j) if one or more patents are highly relevant to FTO, provide
- strategy relating to those patents (design around; buy; license; invalidate)
- detailed information on owner of such patents (are they typically aggressive, do they tend
to litigate, assert patents proactively or enter into licensing agreements? do they settle if
they litigate?)
3. Provide details of any claims by other companies against the SME relating to FTO.
d) Key Patent Questions That Investors Ask
Over the past decade, investors have become more sophisticated in their due diligence of SMEs before
investing. Their questions are drawn from the checklists provided above. Depending on the answers
obtained, there may be additional rounds of diligence (including follow-up calls or meetings with inventors;
with patent advisers to the SME; and with independent patent advisers to the investor).
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e) A “Blue Sky” Patent Strategy for SMEs
i. What are investors looking for?
A blue sky patent strategy for SMEs is one that responds to all the questions set forth in the checklists
above. In addition, invariably there will be an anticipated challenge (or challenges) in the patent strategy,
and investors are looking for management of the SME to be well briefed on how it proposes to overcome
the challenge with different options depending on different scenarios.
ii. What is Big Pharma looking for?
A blue sky patent strategy for Big Pharma is one that makes it relatively easy for it to carry on with the
patent program. Most Big Pharma (once it in-licenses or acquires the patents of the SMEs) will expect to
be in complete control of the patent strategy. A sound blue sky patent strategy (1) is consistent from
country to country; (2) contains no damaging admissions or concessions on the public record (because
patent prosecution is public and competitors will read the public record when seeking to attack the
patent); (3) is reasonable in approach (i.e., if claims are sought, data in the patent applications support
the claims); and (4) contains no mistakes that would be difficult to correct (e.g., the U.S. patent issues,
but the SME had prior art relevant to that patent that had been uncovered in patent prosecution in other
countries and failed to bring that relevant art to the attention of the U.S. Patent and Trademark Office
before the patent issued).
Although Big Pharma will be interested in the SME’s responses to the questions set forth in the checklists
above, it typically has seasoned in-house patent attorneys and external counsel and will form its own
views on how to handle any anticipated challenge (or challenges) in the patent strategy and the
management. Different pharmaceutical companies have different risk tolerances. While some will not be
dissuaded from in-licensing even though there is an FTO issue, others will regard that as a deal breaker
(e.g., if the Big Pharma is litigation averse). The risk tolerances of Big Pharma are determined by their
boards and upper management. If a Big Pharma has become involved in adverse patent litigation, or if
the board and upper management are risk averse regarding patent litigation, that will have an impact on
whether the company has an appetite to license or acquire patents from the SME if the patents are
associated with litigation risks.
iii. Should the patent strategy differ according to the “exit”?
SMEs cannot always be sure what the future exit will be. Sometimes, the SME may consider the exit to
be a public offering or a takeover, but instead it ends up out-licensing the patents and innovations to a Big
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Pharma , or vice versa. As a result, the patent strategy should be one that has regard to the budget and
optimizing protection on a reasonable basis, and should not depend on the form of exit.
iv. Defensive and offensive patent strategies
In the early stages of the development of an innovative product, it is unclear whether the product will
succeed and become a blockbuster or will fail in the clinic (or before) – never to be commercialized. A
defensive strategy of an SME involves trying to create a patent strategy that can be leveraged if the
product becomes a blockbuster. In such a case, litigation can be expected.
Patent litigation is routine for biotech – investors in companies that employ biotechnology should expec t patent litigation. But, companies facing or in lawsuits usually negotiate licensing agreements to allow everyone to move forward b ecause lawyers routinely advise clients that settlements are preferable to rolling the dice – allowing a judge or jury to decide your dispute.33
An additional defensive strategy consists of gathering as much information as possible on any third-party
patents that could create problems with regard to the SME’s (or a Big Pharma’s) ability to take the drug to
market. This defensive strategy can include gathering prior art that might invalidate the third-party
patents, determining whether the third parties typically grant licences to the patents, seeking to purchase
blocking patents and designing workarounds to blocking patents.
Why is this defensive strategy for SMEs a necessity? Because a litigation challenge for a patent covering
a blockbuster drug is a virtual certainty. A recent study prepared by PricewaterhouseCoopers LLP
concluded that patent litigation continues to increase amid growing awareness of patent value, and
biopharmaceutical patent cases are on the rise.34 Not only are generic companies’ strategies based on
litigating patents35 rather than conducting R&D, but a widely held view, particularly in the
biopharmaceutical industry, is that it is good policy to encourage potential competitors to challenge
current patent holders.36
Offensive strategies (asserting patents against other companies) are typically not part of SMEs’
strategies, because they are costly and divert management’s attention away from product development
and towards expensive, uncertain and time-consuming litigation. However, an SME that is further along in
its development can have an out-licensing strategy as part of its offensive patent strategies; this would
33 http://www.fool.com/portfolios/rulebreaker/2001/rulebreaker010122.htm. 34 http://www.pwc.com/en_US/us/forensic-services/publications/assets/2012-patent-litigation-study.pdf. 35 http://www.sutherland.com/files/Publication/8ef32e81-b2b1-4a27-af33-4a73e8931775/Presentation/PublicationAttachment/24a0f9d2-7c22-4d9c-90b2-a5fc1c8f14cb/GenericDrugMakersIP.pdf. 36 http://ipjournal.law.wfu.edu/2011/12/blockbuster-drugs-including-lipitor-reaching-the-end-of-their-patents/.
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consist of seeking to assert its patents against third parties and either sell the patents (if they are not core
to, or otherwise needed in, the SME’s business) or license the patents, thereby creating a revenue stream
for the SME to support its commercialization efforts. If the offensive strategy includes litigation, SMEs
typically partner with Big Pharma, especially if it is their first encounter with patent litigation and if the
market is either the United States or Europe.
f) How Are Patent Strategies Typically Handled in SME–Big Pharma Alliances?
Alliance agreements can set out patent filing and prosecution strategies in one of several ways: (1) the
SME completely controls the strategy after the agreement is executed (rare); (2) the Big Pharma
completely controls the strategy after the agreement is executed (more common, especially if the Big
Pharma is financing the patent program); (3) the SME controls the strategy after the agreement is
executed, with input from the Big Pharma (common); or (4) the Big Pharma controls the strategy after the
agreement is executed with input from the SME (common). Big Pharma tends to implement different
patent strategies from those implemented by SMEs because they can have a different perspective from
that of the SMEs.37 For example, the Big Pharma will consider (a) how the product of the SME fits in with
the rest of the Big Pharma’s portfolio; (b) how the SME’s patent strategy can be improved; (c) how the Big
Pharma’s expertise in patent filing and strategy can be leveraged to protect the product in-licensed; and
(d) whether the Big Pharma will be taking an aggressive licensing or aggressive enforcement (i.e.,
litigation) position, vis-à-vis the patents in-licensed from the SME.
Typically, a Big Pharma’s blue sky strategy tends to seek control of the patent filing and prosecution
strategy. SMEs can resist this position if they have leverage. The downside with giving complete control
to a Big Pharma (if the patents are out-licensed by the SME) is that while the patents are still owned by
the SME, it can nevertheless lose control of the overall patent strategy.
When a Big Pharma handles the strategy, it typically assigns one in-house patent attorney to be
responsible for the portfolio. Generally this attorney has considerable expertise and experience in filing,
prosecuting and enforcing patent applications for products worldwide. SMEs sometimes remark that they
lose all involvement in the overall patent strategy once the Big Pharma assumes control. The agreement
between the SME and the Big Pharma can anticipate this challenge and build in controls, so that the SME
is involved in the patent filing and prosecution of its innovations.
37 http://www.fenwick.com/publications/Pages/Monoclonal-Antibody-Patents-Evolving-Law-and-Strategies.aspx. “Biotechnology patenting and patent strategy have always been markedly different than that of the pharmaceutical industry.”
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g) Typical Mistakes Made by SMEs Relating to Strategies
i. Which mistakes will investors/Big Pharma tolerate? Which mistakes break an investment / deal?
The “show-stoppers” (i.e., issues uncovered in the due diligence that would either terminate discussions
between SMEs and investors/Big Pharma or decrease the valuation) tend to be in one of the following
categories:
The SME has not chosen the most advantageous chain of title. From time to time, the SME will not
have identified the chain of title before approaching investors/Big Pharma. This is a serious error. Some
founders of SMEs have filed the patent applications in their own names and believe that there is an
advantage to having the patent applications held by them personally, as opposed to having them held by
the SME. Investors recognize this error immediately and will question why they should invest in an SME
that does not hold the most significant asset – that is, the IP. They will also question whether the founder
has the best interests of the SME at heart (or whether the founder has diverging interests, is conflicted, is
holding back information, etc.). Other founders of SMEs have not considered whether other inventors,
research institutes or universities may have an ownership interest in the patent applications; or if founders
have considered these possibilities, they have not dealt with how the SMEs plan to deal with this issue
before approaching investors. This is another serious error.
The innovation claimed is not patentable. Sometimes, there are publications (prior art) or disclosures of
the invention (either by the inventors or other persons working in the field) that result in the innovation not
being patentable. This information may turn up in due diligence, especially if the investor or the Big
Pharma pays more attention to the searches conducted by the patent offices than the SME did, or if the
investor/Big Pharma does searches of its own to assess patentability. Sometimes the patent agent/patent
attorney of the investor/Big Pharma reaches a conclusion different from the conclusion of the advisers to
the SME, finding that the innovation of the SME is not patentable. Sometimes the innovation is not
patentable because the laws of certain countries have determined that the innovation is not patentable
(i.e., non-patentable subject matter). If the investor or Big Pharma concludes that the innovation is not
patentable and there is no way around this in critical markets, that is typically a deal breaker.
The patent applications do not cover the product. In certain cases, during due diligence, investors/Big
Pharma learn that the patent applications do not actually claim the product (e.g., there is an error in the
genetic sequence claimed; the claims contain unimportant restrictions that can be designed around; or
the claims are not directed to the product). This is typically a deal breaker unless the SME has a strategy
for correcting this error and brings it to the attention of the investors/Big Pharma.
The SME has a reactive patent strategy. Some SMEs have a strategy of filing a patent application for
each innovation that comes out of the lab – that is, a reactive (rather than a proactive) patent strategy.
That can prove to be expensive. A reactive patent strategy is one that is almost routine – as soon as any
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invention disclosure is available, a patent application is filed for that disclosure. Certain SMEs boast about
the number of patent applications that they have filed, without regard to the quality of those applications
or how they fit strategically with the SME’s business plan. A proactive patent strategy has the following
characteristics: (1) It is based on the SME’s business plan and any invention disclosure outside that
business plan does not divert time, money or resources of management (or merits a discussion before
time, money or resources support that invention disclosure); the preferred strategy is to restrict patent
application filings to those innovations that dovetail with the business plan. (2) It identifies gaps in the
market and determines how the business plan fills those gaps. (3) It casts an outward gaze on the patent
activities of competitors to ensure that it is ahead of market.
Investors/Big Pharma will seek to determine whether the SME has a proactive patent strategy, what the
strategy is and how the strategy dovetails with the business plan.
The SME has no control over costs. It is relatively easy to identify an SME that does not have a
strategy to control patent costs. Such an SME typically does not have answers readily available to the
following questions: (1) What is your annual patent budget? (2) What are your cumulative patent costs to
date? (3) What steps do you have in place to manage patent costs? (4) How do your patent costs
compare with the benchmark? (5) What do you expect your patent costs to be in the next year, in the next
five years, and why? (6) What are the patent costs you can control and how are you controlling them?
(7) What are the patent costs you cannot control and why?
Each SME should have a patent budget and should determine the breakdown of that budget in the
context of its business strategy. Is the budget best spent on filing for the key innovation, filing for
variations to the innovation or on freedom-to-operate searches? This is best determined by senior
management, who would know from discussions with investors and potential business partners what they
regard as the keys to the SME’s success. An SME that is disconnected from the concerns of investors or
Big Pharma can sometimes make mistakes and not focus on key patent concerns. An SME that attracts
investors is one that has a budget and pays as much attention to its patent strategy as to its business
strategy (e.g., reporting to the board at each meeting on the patent strategy, offensive and defensive;
assessing whether patent performance is achieved each year; having a primary, secondary and tertiary
patent strategy for key products and key concerns, such as patents of third parties; and managing costs).
The patent applications appear to be more theoretical than product-oriented. For early-stage
innovations, it is difficult to provide significant data in the patent application to support the innovation. If
every SME were required to produce clinical trial or in-human data in its patent applications, many patent
applications would be deferred in their filings for years (to the SME’s detriment). On the other hand, filing
early, without data to support the innovation, can also be detrimental. (If the SME does not expect to have
data to support the innovation within a year of filing of the patent application, the SME is likely filing too
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early).38 An SME is filing too late if it has data to support the innovation and has not yet filed a patent
application, or worse, has data to support the innovation and has published that data without having filed
a patent application. The four requirements stated earlier in this Report are relevant here. To
commercialize a biopharmaceutical product or process in the life science space (i.e., for early-stage
SMEs, this means attracting investors), the company needs an innovation that can be (1) put into
practice; (2) that can be protected; (3) that has a market; and (4) for which someone will pay. Many
innovative products can meet one or two of these requirements, but few are able to meet all four. If the
SME is filing too early on its innovation, there is a significant risk that the innovation cannot be put into
practice and cannot be patent-protected (i.e., the invention is not enabled, is not supported in the patent
applications and does not meet the utility requirements). Investors will expect the SME’s strategy
regarding data to support the innovation and to advance the patent strategy.
The patent strategy is run by the patent agent/attorney with no input from senior management. Too often, with senior management of SMEs being busy, the patent strategy is delegated to either a
person within the SME who is not a member of the senior management team or to outside advisers. This
is a mistake. The best patent strategy of an SME is one that involves the input of senior management, the
outside patent agent/attorney and the person within the SME who will execute the strategy. It is also
critical that these persons meet regularly (e.g., monthly or quarterly, depending on which stage the SME
is in) to update the strategy in view of various inputs: feedback from investors; feedback from Big
Pharma; feedback from board members; feedback from patent offices; feedback from competitors’
activities; feedback from the market; feedback from monthly patent searches; feedback from the
regulatory department; feedback from business or scientific team; and input from CFO regarding actual
costs versus budget.
ii. How to fix mistakes?
For early-stage SMEs, the good news is that most patent mistakes can be fixed or at least ameliorated. If
the patent does not adequately cover the product, improvement patents can be filed to the dosage form,
formulation or indication. If inadequate data support the invention as claimed, additional patent
applications can be filed, seeking to patent the improvements with supporting data. Patents that contain
errors can be reissued. Fixing mistakes comes at a cost, one of which is that the mistake is often
apparent from the public record after a person seeks to fix the mistake. The question is whether the
product is so valuable (i.e., has a market and is an innovation for which someone will pay) to justify the
time, effort, cost and public disclosure that are often associated with fixing the mistake. From the
viewpoint of the investors and Big Pharma, it is best for the SME to admit right away that there is a
mistake and to have a proactive strategy for fixing or managing the mistake. The worst situation would be
38 Unless the SME has a generous patent budget and wishes to file patent applications and abandon them and refile them until it has sufficient data.
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for investors or an interested Big Pharma to discover the mistake while conducting due diligence and for
the SME not to have either admitted the mistake or have a strategy for fixing it.
h) Licences as an Integral Part of the IP Strategy
One of the key mistakes made by SMEs is giving short shrift to their IP licences. Licences vary
tremendously. Simply “getting a licence” is not the end of the analysis. The critical question is what rights
and obligations are set forth in the licence. A licence can be a non-exclusive licence to use a given
diagnostic reagent and, on the other end of the spectrum, can be exclusive and therefore akin to an
assignment except on termination or in a bankruptcy scenario. SMEs routinely under-invest in their in-
licences and out-licences and find that rights they thought they had are not theirs or can be easily
terminated. Sophisticated Big Pharma and investors are very sensitive to the terms of licence
agreements, and many SMEs will lose a partner or investor because of inadequate rights under their
licence agreements.
Licence provisions that will deter an investor or partner include the following:
i. In-licences
The in-licence is easily terminable. For instance, often there are termination provisions in the
event that certain milestones are not reached within a specified period of time. It is well-
known that R&D is unpredictable and generally takes longer to reach a goal than an
entrepreneur or inventor plans.
The scope of exclusivity is not broad enough, thus permitting others to compete.
Control of prosecuting and maintaining the patents remains with the licensor. This can be
problematic if the licensor does not cooperate with the licensee or if there are multiple
licensees of the same underlying patent.
Royalties and other compensation are not clearly defined.
There is limited ability to sublicense patents. Most SMEs will need to sublicense a patent to
commercialize products or to enter into an agreement with a Big Pharma or other partner.
ii. Out-licences
The licensee is not progressing with R&D or commercialization at the desired rate and the
SME is unable to retrieve control of the IP and terminate the licence. The SME does not want
a licensee that can shelve the invention.
The licensee is not required to maintain specified standards.
The licence is for a field of use that reduces the value of the IP for a potential licence of all
fields of use.
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Licences do not include a provision that rights to improvements or inventions in related areas
are the property of the SME (licensor).
Licences do not limit competition by the licensors and their affiliates and partners.
While it goes without saying that for all licences it is critical that the scope of the IP licensed be precisely
defined, it is surprising that this is a frequent issue.
There are a myriad of other issues to be considered in a licence. Licence agreements in the
biopharmaceutical field are some of the most complex. Those who look for shortcuts often regret it. It is
imperative to have a defined strategy, the support and advice of industry experts and the patience to
negotiate all important points when putting a licence in place. Once a licence is executed, it is difficult to
renegotiate without having to offer concessions of some kind. Unlike a sales agreement that deals with a
specific transaction at a point in time, a licence is an agreement on which an ongoing relationship is
based.
i) Due Diligence Checklist
A basic checklist of due diligence for licences includes the following:
1. Provide details of any in-licences (or options to in-license) to SME.
2. Provide details of any out-licences (or options to out-license) from SME.
3. Terms to focus on in each of the licences
a) grant
b) territory
c) restrictions on grant
d) definition of “product”
e) improvements
f) compensation
g) minimum royalties, milestones, minimum sales or other performance obligations
h) obligations of SME
i) obligations of licensee/licensor
j) provisions that are atypical (e.g., supply provisions)
k) termination
l) assignability/sublicensing
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j) Establishing a Business
IP issues intersect with business decisions affecting the SME, including when and how to establish the
business. For example, if the patents are initially held in the names of the inventors, questions for the
SME to ask are (1) when should the SME incorporate? (2) where should it incorporate (in Canada or
offshore)? and (3) to which entity should the patents be assigned? There can be tax consequences when
transferring patents from an owner to an SME or from an SME to a related or unrelated SME. For that
reason, it is important for the SME to consider at the outset how to establish its business and which entity
will own the patents and other types of IP. These questions are best addressed before the SME
approaches investors for funding or approaches a Big Pharma partner for a deal. With sophisticated
corporate and tax planning, a business can significantly enhance the financial value of its patents.
k) Financial Incentive Programs for Biotech Companies
General. A number of government financial incentive programs provide assistance to persons with
technological or managerial skills who propose to engage in certain projects that are unlikely to be
initiated without government assistance. SMEs would want to consider whether their projects can benefit
from these incentive programs. The most general of these programs relate to research and development
and can be used as additional financing for research to bolster an IP portfolio and to implement the blue
sky patent practices for SMEs that are recommended in this Report.
Some of the financial incentive programs offered by the federal, provincial and local governments apply to
a broad range of industries and are available to foreign investors. These programs are intended to
promote Canadian industry and technology, increase research and development, encourage new
investment and address the particular needs of those regions in Canada that have lower levels of
commercial development or employment.
The incentive programs differ from one another in the nature and amount of the incentive offered, the size
and type of business eligible for assistance, and the nature and extent of the commitment required from
the principals. The mandates of most of the programs are general; therefore, the criteria for determining a
particular business's eligibility for assistance are somewhat flexible. The assistance provided under these
programs may take the form of grants, subsidies, contributions, repayable contributions, forgivable loans,
participation loans, loan guarantees, equity participation or tax incentives. Additional details about these
programs are set out in Appendix A.
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Case Studies and Lessons Learned
a) Specific Questions Posed by Industry Canada
1. How does a biopharmaceutical company’s IP protection strategy affect its attractiveness for VC investment? What is the minimum level of IP protection considered necessary to attract the interest of a VC fund for an emerging biopharmaceutical company?
The SME’s IP strategy is one of the criteria that determines whether VCs will invest in the SME.
The minimum level of IP protection necessary to attract the interest of a VC is (1) IP that is owned
by the SME or IP to which the SME has a clear and firm right (e.g., exclusive licence with
provisions to the SME’s benefit); and (2) IP that covers the products or the services being
developed by the SME. The IP typically comprises patent applications, patents and trade secrets.
The SME must have a strategy for filing the patents in other important markets (claiming the
benefit of the first filing date of the patent application) and a strategy for overcoming publications
(prior art), which patent offices could cite against the SME’s patent application to object to
patentability. Another important element is the presence of third-party IP that conflicts with, or is
essential to, the commercialization of the SMEs product(s). There needs to be a clear and
credible strategy to deal with this third-party IP, by (1) challenging it in litigation or quasi-litigious
proceedings such as patent oppositions; (2) acquiring it; (3) in-licensing it; or (4) engineering
around it. In the case of in-licensing, care must be taken to avoid the so-called royalty stacking
problem, whereby multiple royalties payable by an SME for the use of in-licensed third-party IP
are so high that they make effective commercialization impossible.
2. Does the changing pharmaceutical R&D business model towards increased biopharmaceutical SME-Big Pharma MNE alliances and partnerships necessitate a rethink of Canadian biopharmaceutical SMEs’ international patent strategies? How can a company position itself favourably for attracting global pharmaceutical partnerships from an IP perspective?
The SME’s international patent strategies should not change. SMEs position themselves
favourably to attract global pharmaceutical partnerships, from an IP perspective, by following the
recommendations outlined in the Report and avoiding costly mistakes that can force an investor
or a Big Pharma partner to walk away from the deal.
3. How does a company’s product portfolio affect its patent strategy (e.g., biological vs. chemical vs. diagnostic/therapeutic combination products)?
An SME’s product portfolio does indeed affect its patent strategy because different products are
claimed in different ways. For example, a biologic is claimed with reference to the gene
sequence, the expressed protein, the purified protein, the composition containing the protein, the
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4. Are Non-Practicing Entities (NPE), so called patent trolls, a threat to Canadian biopharmaceutical companies in international markets? (NPEs are defined as companies that profit by legally enforcing patents, as opposed to developing products.)
NPEs are much more common in the technology and business methods areas than in the
biopharmaceutical area. That said, there are NPEs who do assert their patents against
biopharmaceutical companies. However, this does not typically happen at the stage of the SME
because the NPEs tend to deploy their efforts against Big Pharma or against large
biopharmaceutical enterprises that are well funded and can pay large cash settlements.
5. What strategic considerations does a biopharmaceutical SME need to address when filing a patent or seeking to protect an innovation claimed in a patent?
The strategic considerations and related questions are outlined in this Report. They include the
following:
(i) who owns the patent application?
(ii) have all inventors been identified and has ownership been dealt with?
(iii) what are the cost/budget considerations for the filing?
(iv) how to effectively protect the innovation in view of this budget?
(v) which countries to file in?
(vi) how to stagger the patent filings in various countries in order to manage costs and timing?
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(vii) has the innovation been published before filing or is the innovation targeted for publication, and are other SMEs or Big Pharma aware of the SME’s work?
(viii) whether to file if there is no or little or marginal data to support what is claimed in the patent application?
(ix) whether the quality of the patent application will assist in attracting investors or Big Pharma?
(x) how to deal with improvements to the innovation in the first year after the patent application is filed; in the second year?
(xi) whether to file a PCT application before the anniversary of the first filing date or whether to file national patent applications rather than a PCT?
(xii) which countries in which to file the patent application before the anniversary of the first filing date if national filings are the strategy?
b) Additional Questions that Torys Answers in its Report:
1. What is a sound patent-ownership strategy and why does it matter?
The Report answers this question.
2. In the start-up year of an SME, if the budget for patents is constrained (e.g., less than $5,000; less than $25,000; less than $50,000), how is that money best spent?
In all cases, the budget must be strategically managed. For an annual budget of $5,000, the SME
would first assess whether it needs to expend those funds or whether it can defer its patent costs
until it is further along in its research. If it decides that it needs to file a patent application, the
SME would need to do as much of its patent work as possible on its own, and save the $5,000 for
the disbursements associated with filing the patent applications with the USPTO. An allocation of
$5,000 annually for patents will be extremely challenging to manage.
For an annual budget of $25,000, which is an excellent start to an SME patent program, the SME
should first assess whether it needs to expend those funds or whether it can defer its patent costs
until it is further along in its research. If the SME decides that it needs to file a patent application,
the SME would want to take the following measures: ensure that at least one patent application
properly protects its innovation, assess whether to file improvement patent applications in its first
year; prepare itself to file a PCT application to preserve its right to file the patent application in
other countries; ensure that it has at least one high-quality patent application sufficient to attract
investors; and determine whether additional funds are well spent in monitoring the patents of third
parties in order that there is FTO.
For an annual budget of $50,000, the SME can devise a robust and thoughtful patent strategy.
Again, the SME would first assess whether it needs to expend those funds or whether the funds
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3. If an SME is granted a meeting with a prospective investor, what are the patent strategy points that the SME must convey in the meeting and why?
The SME must convince the investor that it has a thoughtful and well-managed inward-looking
and outward-looking patent strategies and has addressed all the key requirements outlined in the
Report.
4. What is the patent filing strategy adopted by most SMEs in Canada and does the strategy work?
Most SMEs have an adequate patent filing strategy, but the strategy can fail for one or more of
the reasons outlined in the Report.
5. How can an SME with limited resources undertake an international filing strategy (for India, China, etc.) that will eventually attract global pharmaceutical partnerships?
An SME can undertake an international filing strategy if it is strategic and focused in how it
engages outside patent agents/attorneys and is prepared to do much of the legwork itself, be
responsive to feedback of investors and other interested parties and dedicate its funds to the
disbursements associated with an international patent filing strategy. First, the SME needs to
determine the countries that are critical to its success (if the SME’s projected exit is a deal with
Big Pharma, what are the current markets that are critical to Big Pharma in that disease area; in
which countries has Big Pharma launched products in that disease area). Second, the SME
would stagger patent prosecution. To have patent prosecution move forward at the same time in
several countries can be costly and can result in inconsistency in the international patent strategy.
So the SME would pick one or two countries, move patents forward in those countries and defer
prosecution in other countries. Third, the SME would instruct outside counsel to keep patent
applications alive but not to do any substantive work on the patent applications (e.g., responding
to letters from the patent office) without the SME’s express instructions. That way, the SME can
leverage work done in one country for the benefit of work to be done in another country.
6. If an SME’s product is a success, what type of attacks can the SME expect on its patents? How does an SME protect itself from those attacks?
As outlined in the Report, if an SME’s product is a success, the SME can expect that the
patent(s) for the product will be attacked by third parties. This is because the patent blocks third
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An SME can prepare itself for attacks by gathering the necessary underlying information, by
being realistic about the weaknesses in its own patent portfolio (since there are always
weaknesses) and by having a strategy in place to eliminate or lessen those weaknesses over
time. An SME can also prepare for attacks from third parties that may assert patents against the
SME; in this case, the SME would have an FTO search strategy that would include having a plan
in place to deal with any blocking third-party patents, by doing one or more of the following:
(1) allege that the third-party patent is not infringed; (2) allege that the third-party patent is not
valid; (3) allege that the third-party patent is not issued or likely to issue in the jurisdictions in
which the SME will manufacture, use or sell the product; (4) commercialize the patented product
or process, only once the third-party patent expires; (5) plan to seek a licence (exclusive or non-
exclusive) to the third-party patent; and (vi) plan to dispute or even litigate the validity or
infringement of the third-party patent.
Appendix A — Financial Incentive Programs for SMEs Scientific Research and Experimental Development (SRED) Credits
i. Federal SRED Credits
The most significant financial incentive program is the federal and provincial refundable tax credits for
basic science and clinical research conducted in Canada (Scientific Research and Experimental
Development, or SRED, credits) for certain operating expenses and capital expenditures. Subject to
certain limits, a Canadian-controlled private corporation (a CCPC) may receive a 35% federal refundable
investment tax credit in respect of SRED expenditures incurred in Canada. In general terms, a CCPC is a
Canadian corporation that is not a public corporation and that is not controlled, directly or indirectly in any
manner whatsoever, by one or more public corporations or non-resident persons. “Control” in this context
means both de jure control (the right to elect the board of directors where the directors supervise the
management of the affairs of the corporation) and de facto control. If a company is not a CCPC, non-
refundable federal credits of 20% are available.
SRED expenditures include those for work done by the corporation or on its behalf by third parties.
Labour, materials and other costs are included where directly incurred in the pursuit of SRED, subject to
conditions and percentages; there are limits on the amount that can be included in respect of salaries of
certain employees and there are rules that allow for the inclusion of a “proxy” amount, instead of an actual
amount, in respect of overhead expenses.
The refundable tax credits are available on the first $3 million of allowed SRED expenditures per year of a
current nature, provided that taxable income of the corporation for the previous year does not exceed
$500,000 and taxable capital for the previous year does not exceed $10 million (if taxable income for the
previous year exceeds $500,000 or if taxable capital for the previous year exceeds $10 million, the
$3 million limit (the Expenditure Limit) is reduced and is eliminated if such taxable income exceeds
$800,000 or if such taxable capital exceeds $50 million). Prior to the 2012 federal budget, SRED
expenditures of a capital nature also gave rise to refundable investment tax credits (the investment tax
credit rate for such expenditures was also 35%; however, only 40% of the credit arising from capital
expenditure is refundable). As a result of the 2012 budget, starting in 2014, expenditures of a capital
nature will not give rise to any credits, nor will payments (such as lease payments) in respect of the use of
property where the property would be capital property if acquired by the corporation (the Expenditure
Limit applies to current and capital expenditures on a combined basis). For SRED expenditures in excess
of the Expenditure Limit, there is a tax credit of 20%, of which 40% of such credits (or 8% of the
expenditure) is refundable. Starting in 2014, the tax credit rate for those expenditures will be reduced
from 20% to 15% and, again, only current SRED expenditures will qualify.
With respect to qualifying current expenditures, there are special rules regarding salaries, contract
expenditures and overhead expenses. Salaries of employees directly engaged in SRED generally qualify;
however, there is a limit for those who directly or indirectly own more than 10% of the shares of any class
of the corporation or who are considered to not deal at arm’s length with the corporation (Specified
Employees). For those employees, the limit on remuneration is five times the maximum Canada Pension
Plan pensionable earnings (this would amount to a limit of approximately $250,000 in 2012), and
remuneration excludes any bonuses or amounts based on profits. Eligible expenditures generally include
contract payments where the corporation has the right to exploit the results. Where a contract payment is
made to a person who does not deal at arm’s length with the corporation, only SRED costs actually
incurred by the contractor will qualify (i.e., any gross profit component will be excluded); under the 2012
federal budget, if the contractor deals at arm’s length, only 80% of the contractor’s current expenditures
will qualify.
The Canadian Income Tax Act allows corporations to elect to claim a refundable investment tax credit in
respect of a notional or “proxy” amount for qualifying overhead rather than allocating actual administrative
and overhead costs to SRED activities. The amount is a percentage of qualifying SRED salaries (not
including bonuses and benefits). The 2012 federal budget reduces the percentage from 65% to 60% in
2013 and to 55% starting in 2014. With respect to the remuneration of Specified Employees, the amount
thereof is limited for this purpose to 75% of actual remuneration, excludes bonuses and profit
participations and is limited to 2.5 times the year’s maximum Canada Pension Plan pensionable earnings.
ii. Provincial SRED Credits
Most provinces in Canada have SRED tax incentive programs.
The Ontario Innovation Tax (OIT) is a refundable credit equal to 10% of the lesser of its qualified SRED
expenditures and the corporation’s expenditure limit for the taxation year. Eligible expenditures are those
that qualify for the federal SRED credit. Any corporation with a permanent establishment in Ontario that
carries on SRED in Ontario and is entitled to a federal investment tax credit is eligible for the OIT. The
expenditure limit is generally $3 million but phases out in a manner similar to the phase-out of the federal
SRED credit by reference to the corporation’s taxable income and taxable capital, although the threshold
amounts may differ.
Additionally, the Ontario Research and Development Tax Credit is a 4.5% non-refundable tax credit on
qualifying Ontario SRED.
Quebec has a refundable SRED credit of 37.5% for salaries of employees in Quebec. The credit is also
available for 50% of the consideration paid to unrelated subcontractors for SRED performed by
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employees in Quebec. The 37.5% refundable credit applies to the first $3 million of SRED wages of
Quebec employees but is reduced from 37.5% to 17.5% on a straight line if the CCPC and its affiliates
have in the preceding year over $50 million in assets, as assets increase from $50 million to $75 million.
The qualified expenditures upon which the federal SRED credit is calculated is reduced by the provincial
SRED credits.
iii. Summary of SRED Credits
To the extent a corporation is eligible for SRED and other refundable tax credits with respect to qualified
expenditures, the company could receive aggregate refundable tax credits in excess of 50% (up to 56%
in Ontario and up to 67% in Quebec) of the first $3 million dollars for qualifying expenditures of a current
nature in any taxable year and thereafter refundable at lower rates.
Moreover, banks will advance loans on the basis of estimated refundable SRED credits. Claims for SRED
credits are made to the Canada Revenue Agency at the same time as filing a Canadian income tax
return.
iv. Other Incentives for Biopharmaceutical Companies
Each province has additional incentives available, which are largely dependent on a variety of specific
factors. Some, but not all, of these programs are discretionary programs and must be applied for. For
instance, in Ontario, which boasts 25 research hospitals and over 10,000 research scientists, in addition
to SRED credits, government incentives for life sciences include the following:
Grants are given to approved companies creating at least 100 jobs or investing C$25 million.
Repayable loans for up to 50% of cash contributions by certain angel investors and VC firms.
Several other Ontario funds have grants and loans available for early-stage companies,
particularly in the medical technology field.
Appendix B — Author Biographies39
Eileen McMahon, Partner
Tel: 416.865.7676 | email: [email protected]
Eileen M cMahon i s the co-chai r of T orys' Intelle ctual Prope rty and Drug Regulatory P ractice. Eileen prac tises ex clusively in the area s of intellectual property and drug regulatory law, and is one of a handful of Canadian lawyers who a dvise on re gulatory clea rance a nd intelle ctual prop erty protection o f products.
Eileen has worked with most of the top 20 pharma companies (by worldwide revenue) on their patent and regulatory strategies. She has also worked with hundreds of SMEs that have licen sed their inventions to pha rma, who hav e been acquired by pharma, or who have been financed by investors.
Eileen has been re cognized by leadin g nat ional and international directories as an exp ert in pate nt la w, biote chnology law an d regulatory la w. She i s a regular columnist of the Chronicles of Healthcare Marketing (“Legal or What”), and a feature d speaker at confe rences of the biotechnolo gy, pharmaceutical industries.
Eileen is a registe red patent and tra demark agent in the United States an d Canada. Sh e is also a Certified Li censing Profe ssional of th e Licen sing Executive Society (LES) (2011-2014) in the United States and Canada.
Eileen i s o ne of Canada's Top 100 Most P owerful Wome n (Wome n's Executive Network).
Eileen was admitted to the Ontario Bar in 1987. She received her LLB in 1985 from Osgoode Hall La w School, York University and her BSc (B iochemistry and Chemistry) in 1982 from University of Toronto.
39 The authors would like to thank Jacob Weinstock, an articling student with Torys LLP, for his invaluable assistance in preparing this Report. Jacob completed the JD/MBA at York University. Before law school, Jacob worked as a senior financial analyst.
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Cheryl Reicin, Partner Tel: 416.865.7979 212.880.6067 | email: [email protected]
Cheryl Reicin is the Chair of Torys' Corporate Life Sciences Practice. Cheryl’s practice focuses on U.S., Canadian and Israeli biotechnology, medical device, health inform ation, health servi ces and other tech nology-based companies, and re presentation of pri vate equity/venture capital funds and investment banks that fund such co mpanies. Sh e also rep resents acade mic medi cal centers and universities. Her client s range fro m inventors a nd start-ups to OrbiMed, Amgen and Pfizer.
Cheryl a ssists compa nies o n ventu re an d late r-stage finan cings, IPO s, mergers an d acq uisitions, licen sing transactio ns and joint ven tures and alliances with strategic partners. She al so advises on domestic and international structuring and strategies for alternative financing. Her expertise includes acting on the largest U.S./Canadian cross-border IPO in life sciences as well as the largest U.S./Canadian cross-border license agreement.
Cheryl is a director of T he Hospital f or Si ck Children, th e chairman an d founder of Genesis, an incubator for social innovation, and is on the Business Advisory Boards of Health Technology Exchange (HTX) an d of T he Institute for the Study of Aging. Cheryl is also a Certified Licensing Professional of the Licensing Executive Soci ety (LES) (2 011-2014) in the United States and Canada.
Cheryl received her JD in 1984 from Harvard Law School and her BA (summa cum laude) in 1980 from Barnard College, Columbia University. She hea ded an 85 attorney life science practice in the U.S. before moving to Canada.
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